MIDAS technical analysis

In finance, MIDAS (an acronym for Market Interpretation/Data Analysis System) is an approach to technical analysis initiated in 1995 by the physicist and technical analyst Paul Levine, PhD, and subsequently developed by Andrew Coles, PhD, and David Hawkins in a series of articles and the book MIDAS Technical Analysis: A VWAP Approach to Trading and Investing in Today's Markets. Latterly, several important contributions to the project, including new MIDAS curves and indicators, have been made by Bob English, many of them published in the book. Paul Levine's initial MIDAS work and the new MIDAS approaches developed in the book and other publications by Coles, Hawkins, and English have been taught at university level and are currently the subject of independent study intended for academic publication. The same MIDAS techniques have also been widely implemented as part of private trader and hedge fund strategies. The MIDAS curves and indicators developed by Levine, Coles, Hawkins, and English have also been commercially developed by an independent trading software company for the Ninja Trader trading platform, while individual curves and indicators have been officially coded by developers of a large number of trading platforms, including Metastock, TradeStation, and eSignal. The new MIDAS curves and indicators are in line with the accomplished MIDAS goal of developing an independent approach to financial market analysis with unique standalone indicators available for every type of market environment while also offering information not available from other technical analysis systems.

The MIDAS Approach to Technical Market Forecasting The MIDAS approach to the technical forecasting of asset prices reduces to five key tenets concerning market price behaviour.

Tenet (1) Underlying all superficially random asset price behaviour is an order that cannot be identified by the majority of technical analysis approaches. This order - a complex fractal hierarchy of support and resistance levels - is the fundamental reality intrinsic to market price behaviour. Price movement occurs when price tests support or resistance and either breaks to new levels or fails in this process, in which case asset prices either reverse or continue to test until a break does occur, eventually moving prices to new levels.

Tenet (2) This fundamental order in the markets - the interplay between support and resistance - is a coaction between accumulation and distribution.

Tenet (3) The trading psychology behind accumulation and distribution can be analysed quantitatively from raw price and volume data and reveals a mathematical symmetry between price support (accumulation) and price resistance (distribution). In other words, the same mathematical formulae can be used to forecast future levels of support as resistance levels.

Tenet (4) For input to the mathematical formulae, it's essential to focus on price and volume data subsequent to a reversal in trend and thus to a major change in asset market sentiment. Price-derived analytics such as moving averages deemphasize these critical changes and so mix periods of differing underlying market psychology, thus contaminating new shifts in accumulation and distribution. Moving averages also neglect market volume. By contrast, MIDAS algorithms locate the real order underlying asset prices at the Volume-weighted average price (VWAP) taken over an interval subsequent to a reversal in trend.

Tenet (5) Asset price support (accumulation) and resistance (distribution) is fractal, meaning that an underlying order to asset market prices can be found at all degrees of trend in self-similar arrangements. Initially this insight was applied by Paul Levine to daily and weekly charts, but Andrew Coles also later applied it to intraday timeframes, thus extending the MIDAS system for day-trading applications.

Two Drawbacks with MIDAS Technical Analysis There are two drawbacks in the timing of asset price moves in MIDAS technical analysis centering on the problems of price porosity and price suspension. The former refers to a shallow penetration of a MIDAS curve by asset prices. The latter refers to a premature turning of asset prices prior to reaching a MIDAS curve. Levine fully recognised the former problem. The latter issue was first identified by Coles. Levine assumed that this asset price/curve "elasticity" problem was intractable due to the MIDAS approach being a "simple approximation to a more complex and less deterministic reality." However, with the development of Gen-2 curves, Hawkins' study of long-term volume trends, and Coles' formulation of four volume-based trading rules for MIDAS curves, the elasticity problem is now entirely understood to be a volume problem. Coles and Hawkins have each put forward various techniques to deal with it.

MIDAS and the VWAP (Volume-Weighted Average Price) The basic VWAP formula is very slightly amended in MIDAS approaches, with the volume in the denominator of the MIDAS formula at the start of an indicator's launch being continually subtracted from the cumulative volume of the current price bar. The basic formula is as follows:

MIDAS = [ y i ( x i ) − y i j ( x i − d i j ) ] d i j {\displaystyle {\text{MIDAS}}={[y_{i}(x_{i})-y_{ij}(x_{i}-d_{ij})] \over d_{ij}}}

where: xi = cumulative volume of bar xj = cumulative price of bar dij = cumulative volume difference between price bars i and j = xi - xj This same minor volume amendment underlies all MIDAS indicators when they are created from Gen-1 curves (see below).

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